Good day, ladies and gentlemen, and welcome to The Clorox Company Fourth Quarter and Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants will be in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. [Operator instructions] As a reminder, this call is being recorded. I'd now like to introduce your host for today’s conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Thanks Paul. Good afternoon and thank you for joining us. On the call with me today are Linda Rendle, our CEO and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments and then we will take your questions. During this call, we may make forward-looking statements, including about our fiscal 2023 outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statement section, which identify various factors that could affect any such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP Financial Information section in our earnings release and the supplemental financial schedules in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I'll turn it over to Linda.

Hello, everyone and thank you for joining us. Our fiscal 2022 results reflect a very challenging operating environment, including record-high input cost inflation and ongoing pandemic-driven volatility. We navigated this environment by taking a broad set of actions within our control to rebuild margin while continuing to invest in innovation and our portfolio of trusted brands to position Clorox for long-term success. This allowed us to deliver results in line with our outlook, including another quarter of sequential gross margin improvement. While we look forward to a return to our more normalized environment, we are not there yet. We expect the environment to remain difficult in fiscal '23, as we lap COVID impacts on our business, demand continues to normalize, particularly in our cleaning and disinfecting portfolio and factors like input cost inflation and supply chain disruptions persist. We'll keep addressing these challenges head on through actions that include revenue management, further pricing, ongoing cost management and supply chain optimization, our digital transformation and the streamline operating model. We announced today. At the same time, we're committed to maintaining our category leadership and delivering superior consumer value. I'm confident that our Ignite strategy continues to position us well for the future. We remain committed to delivering on our 3% to 5% sales growth target over the long term and are on the right path to drive consistent profitable growth over time and create shareholder value. With that. Kevin and I will open the line for questions.

[Operator instructions] And our first question comes from Peter Grom of UBS. Your line is open.

Hey, good afternoon, everyone. So I guess I just kind of wanted to start with a pretty broad question. On the initial guidance, just kind of given where it all landed versus expectations, I would be curious like Linda or Kevin, would you characterize this outlook as conservative? Is it prudent? Just trying to understand the comfort and the range at this point, just given what we've seen over the past year.

Hi, Peter. Thanks for the question. Yeah, let me talk about our guidance and maybe a few thoughts. The first is we view this guidance as balanced, but certainly balance in what we see today. As you saw in our outlook, we provided a wider range, both on the top and bottom line. And I think what that really indicates is we believe we continue to operate in an environment of heightened volatility and I'll be the first to admit, I don't think we've done a particularly good job of estimating the cost environment. And so, as we look forward, we're projecting about $400 million worth of cost inflation or supply chain. We think that's a balanced approach to take at this point, but I'll acknowledge there's a lot of variability there. We're going to watch that very closely and obviously update folks as we progress through the year. But we think to start the year, this is the right outlook. And again, the wider ranges speak to the heightened volatility we're dealing with.

Thanks. And then maybe just following up on just the organic sales outlook, but just trying to understand the confidence around the continued strength across the rest of the rest of the portfolio, you highlighted the release and to prepare remarks that organic sales growth, excluding cleaning was -- I think was up mid-single digit. So is that kind of the expectation moving forward? And if so, what kind of gives you confidence that you won't see the moderation in some of these other categories looking ahead?

Yeah, Peter, we feel very good about our portfolio overall. As you saw in our prepared remarks, if we set aside the health and wellness sector, and if you start with Q4, for the rest of our portfolio, our household essentials, our international business, we about 5% organic growth feel very good about the strength of that portfolio. When you think about health and wellness, I would say pricing is playing out very much as we expected. Elasticities continue to be below historical levels, but we've got a couple additional dynamics going on in that segment. As we mentioned, we had inventory reductions that are retailers we saw in April and May, and that had a bit of a drag in the quarter, as well as we continue to see demand moderation in cleaning and disinfecting behaviors with consumers. And we think that's going to continue. And so if you look at what we saw in Q4, as we project forward at fiscal or '23, we continue to expect to play out somewhat similar. As we look forward, we feel very good about household essentials and international. I think our pricing will continue to perform well now, I think it's worth noting, we have assumed in our most recent price increase, we took in July, we've assumed elasticities revert back to what we saw historically, which means more negative than we've seen over the previous two price increases, and we just think that's a prudent assumption to make given the pressure consumers have been under and we expect it'll continue to be under going forward. But overall I'd expect on the bulk of our portfolio. You'll see favourable price mix in the high single digit range and volume down likely low single digits, similar to what we saw in Q4. And then I think in the health and wellness segment again, feel very good about our pricing actions. I feel very good about the health of that business. If you look at our home care portfolio, we continue to grow share. We grew share last year. If you look particularly our wipes business, I think we've grown share for the last six quarters and so the business itself is very healthy, but we have to recognize, we expect to continue to see some moderation and share behavior and that'll play out in the category. So we expect that category to be down but our business is quite healthy within this category.

Thanks so much. I'll pass it on.

Our next question comes from Andrea Teixeira - JPMorgan.

Thank you. Good afternoon. So I want to go back to the assumptions of the minus future plus three organic growth and I know I appreciate that you had to be to provide a wide range. So you just discussed now that the pricing that is embedded and I'm assuming that is a fixed part a price mix would be about high single. So it implies that you'd think at the bottom of the range that you have, a minus 6%-ish if you will, like 5%, 6% in volumes and then conversely, a more healthy environment on the top range. So just to kind of pause here and think what are you embedding there? It's still mostly on the health and wellness, the cleaning division that you expect that to be down, or you're also embedding declines in the other component. And I have a follow up on the cost side, the $400 million that you were expecting, is that based on spot or you're also using the curve as you normally do?

Hi Andrea and thanks for the question. In regard to our sales outlook on organic sales growth of minus 3% to plus 3%, that assumes very similar to what Peter and I were talking about, good solid performance on our household essentials and international portfolio that I expect positive sales growth there. I do expect our health and wellness segment to be down for the year. And that's primarily driven by the demand moderation we expect particularly including disinfecting. And folks you have to remember if you think about the lapse we have this year, last year in both Q1 and to a lesser extent, Q3, we had both the Delta and Omicron variant spreading in the US, and we had very strong performance in the prior year. So we have to lap that in addition to some moderating consumer behaviors, and as a result of that we think the health and wellness segment will be down in sales for the year, but that's really driven by the category much less. So based on the strength of our business. Just Andrea, as as an example, if you think about Q1 last year, very strong performance for cleaning and disinfecting business. And in fact, our wipess business on a unit basis, that business was up over 50% in Q1 of last year. So we have to lap that, and you may have seen my prepared remarks as a result of that, we think our, our cleaning and disinfecting business will be down double digits in Q1, and why we think overall sales for the company will be down high single digits. It's really driven by the lap of Q1 in the previous year and then we expect to see stronger performance as we move forward. And then on the $400 million worth of input costs, we're projecting this year we base that on what we expect not just on spot rates, but looking forward where we expect commodities to migrate over the course of the year. And as we think about how that will phase into our results, we expect cost inflation, be the highest at the beginning of the year, and then moderate as we move through the year.

That's super helpful. Just a follow up on that like, what is your visibility, as you said, like we use forward curves, but you have some visibility into the first half, correct?

We do. Yes.

So the only thing that's really more forward is more the second half.

Yeah. I'd be careful that we, we have visibility to forward curves for many of our commodities, but keep in mind the level of volatility that we continue to see while there's many outside resources, that project commodity inflation and, and forward curves, I have found in this environment, they are difficult to use as certainty. We've seen quite a bit of variability on, on the services we use, and I think that's true for most folks. And so we have visibility to what we believe how com will play out over the course of the year, but I'm a bit cautious with suggesting that we have certain in the first six months.

Yeah, that's fair. Thank you. I'll pass it on.

Our next question comes from Chris Carey of Wells Fargo and Company. Your line is open.

Hey everyone. Can I just confirm that just the commentary around sales that you expect the health and wellness business, sales to be down for the year, but the rest of the business is to be up. So, I just wanted to confirm these prior lines of questioning. And then, just from a gross margin perspective, you've given some good detail around the makings of the bridge for fiscal '23. Kevin, I wonder if you could perhaps provide a bit more context on the contributing factors between pricing, volume deleverage, you noted $400 million of cost inflation. Is that all commodities or are there other non-commodity cost buckets within that? Any promotional activity, transportation, logistics, you see what I'm getting at? I wonder if you could just maybe contextualize some of these key buckets and where you see the most risk or not.

Hi, Chris. Yeah. Happy to provide some additional insights into the -- where we see the cost inflation occurring and our plans to grow margin. On your sales question, though you are correct, our expectations to help and wellness segment will decline this year offset by growth over the rest of our portfolio. And again, as I mentioned, feel very good about the overall health of our business, but recognize as both lapping the strong performance we had last year, plus the moderating demand by consumers and cleaning disinfecting that that'll have a negative impact on the category for the year. In regard to the cost inflation the $400 million I mentioned is cost inflation across the entire supply chain. That includes commodities, transportation, wage inflation. We are expecting broad based inflation across the entire supply chain, and in regards to what we're doing to offset that is, as you folks know, and we've talked quite a bit about this, our commitment remains that we intend to get back to a pre-pandemic level of gross margin. We lost about 800 basis points last year. And our goal is to build that back over time. As we've said, I think very clearly we don't expect to do that in one year, but we expect to make progress this year and then we'll continue to work at that. We are pulling every lever available to us. And so Chris, you think about the areas that we're pursuing that will drive that benefit this year for us, the, the biggest lever we're pulling is pricing. We have executed now three pricing actions. Two went into effect last year. The third price increase just went into effect last month, that'll have the biggest benefit we expect on our cost structure this year in the…

Thank you very much for that, Kevin. This should be a quick one, but the health and wellness declines you're expecting, can you just offer a quick comment on the professional business clearly, quite challenged this year, are you expecting that to continue or as we've normalized, the sales base you expect that business to get back to growth next year. So thanks for all that.

Sure. Chris, on our professional products division, I'd say overall, we expect modest growth. I think that'll build as we move through the era as we get past some of the comps and we get back to sort of a new level of performance. And particularly as you think about occupancies and professional environments starting to pick up, we think over time, we'll get back to growing that business and likely in the back half of this year and then growing overall for the year.

Okay. Thank you very much.

Our next question comes from Kaumil Gajrawala of Credit Suisse. Your line is open.

Thank you everybody. Can you talk a bit more about the streamlining program and maybe more specifically, what you'll be doing differently how we should be thinking about what impact it may or may not have in the short run on, on top line. And when we think about you raising your long term algorithm to 3% to 5% on the top line in the context of what we're now seeing, is there something we should be just thinking about in terms of your ability to achieve that over the long run?

Sure. Hi Kaumil, I'll start with the streamlining. So, this is our next step in one of our strategic choices connected to our ignite strategy, which is to reimagine work. And back when we released our strategy in 2019, we articulated that we wanted to be a faster and simpler company, and this is the next evolution in that. We're already a pretty efficient company, but we think we can be even more efficient. And these changes will help us meet that algorithm, that sales growth target of 3% to 5% and growing profitably over time as we return margins back to their pre-pandemic state. And what we're really trying to do through this model is get closer to the customer and closer to the consumer so that we can anticipate their needs better, move more quickly and have the entire organization focused on the business unit priorities and having end to end visibility. We expect to implement this beginning in fiscal year 23 coming up here in the end of Q1. We expect to save $75 million to a $100 million over the two years that we'll implement this, that will be an annual savings once we have it fully implemented. And we, over time, the combination of this with our digital transformation will really set us up for that goal of having an organization that moves much faster, much more simple and will support getting, we're targeting about 13% as a percent of sales from an S&A perspective with those two initiatives combined over time.

Got it. And this is separate from your typical productivity savings. I'm sorry about that. But, in your gross margin bridge, you often give the benefit of savings. This is separate and additional correct.

That's right, Kaumil. This is incremental to that. You want to move to the question on long term on 3% to 5%. So, on the 3% to 5%, we still remain committed to that and we see line of sight to that, but it's not going to be linear to get there and Kevin did a good job articulating what some of the factors are that we're dealing with in the short term. And it really has to do with demand, normalization and lapping COVID impact. Back a year ago, we thought that COVID was that the worst of it was behind us before we entered fiscal year '22. We thought inflation was transitory. And that has turned out to be a much longer headwind that we're facing. And if you look at what we experienced from COVID last year, as Kevin said, we had two of the biggest COVID waves, both Delta and Omicron impacting our business. So we have to lap that and get to a more normalized state. We expect that to happen over the course of fiscal year '23, we have some other businesses that are doing some normalization. Kingsford is a good example. It's one of our fastest growing businesses and that's normalizing. But really health and wellness is the biggest portion of that. And as Kevin articulated, we expect the broad portfolio to be growing. And we expect health and wellness to be down next year as a result of this normalization. But as we look at what we delivered, for example, in Q4 our businesses from our organic sales growth perspective, X the health and wellness segment grew 5% so well within our algorithm. If you take a step back and look at the last three years, our business is in aggregate averaged 5% CAGR over that period of time from a growth. So we are in a period of normalization, that's the biggest factor, but we remain confident in our ability to deliver the 3% to 5% and are really happy with the strength of our brands right now 75% of our portfolio deems superior by consumers pricing is going as planned. And we anticipate that it will continue to go as planned in the early insights that we have as we've implemented our third round in July. And what we're just watching really closely is the consumer and watching this environment for them and we will make adjustments to our plans as needed, but we're heading into the period with strong brands, rebuilding margins, so that we can continue to invest and we're just gonna be as nimble as we can to react to a, a really volatile changing environment.

Our next question comes from Jason English of Goldman Sachs. Your line is open.

Hey folks, thanks for slot me. Kevin, the $400 million of incremental cost pressure, I think you said is not just commodities, but it's supply chain as well. A, can you confirm that? And, and B yeah, I think many of us myself included were expecting to see a very big offset come as you in-sourced a lot of the product. Does that $400 million include that offset or is that offset captured somewhere else?

Hi, Jason. Yeah. Thanks for the question. The $400 million does include supply chain inflation broadly across the entire supply chain, not just commodities. And so that will be, we're looking at increased transportation cost, increased wage cost. We have built in the savings as we've exited these contract manufacturing agreements. We've now stepped out of all the agreements that we intend to step out of. It is contributing to our growing gross, our plan to grow gross margins this year. And so really our pricing actions, our cost savings, plus stepping outta these, these arrangements are all contributing to offsetting the cost inflation we're dealing with beyond the cost inflation though, the other item impacting manufacturing logistics is volume de-leveraging. So as we're taking quite a bit of pricing volume will be down for the year that does have some negative impact on manufacturing, logistics, but it's being offset to a certain degree by the exiting of those co back agreements. So that has all included in our bridge.

Understood. That's helpful. And I have a lot of questions, but I'm afraid I'm going to have to burn one on, on a simple modeling math question, because I've loaded up my model here and I'm still having a hard time getting down to your EPS that you've guided to despite seemingly getting like the gross margin, the other spend levels, right. Interest expense is the last variable. Like what are you assuming on interest expense and do you have a sharp uptick coming with maybe with the higher rates?

We don't Jason, we just recently refinanced debt maturities coming due over the next several years. And so this last quarter we called $1.1 billion in debt refinanced that at a slightly lower interest rate, a, a modest savings in terms of interest expense. The other thing I might point to on a reported basis, if you look at other income and expense, typically we have about $30 million to $40 million worth of charges related to intangible amortization. And then related to the operating model redesign we talked about today we baked in about $35 million worth of restructuring charges that will show up in other income and expense as well. It's about $0.20 as our estimate. So that may be something else you'll look at in your model.

[Operator instructions] And we have a question from Dara Mohsenian of Morgan Stanley. Your line is open.

Can you talk a little bit about pricing from here? Obviously you've implemented some pricing this summer that hasn't been realized through the P&L yet, so that's to come, but as you look going forward, are there plans for any incremental pricing, just given the gross margin aggression over a three year period, even with the rebound expected in the upcoming fiscal year. And how do you think about that line item going forward in terms of price increases versus maybe mix pack, size changes, etcetera?

Sure. Just a reminder for everyone. We just implemented our third significant round of pricing in July, and that is flowing through now to your point and is on track to our expectations. And that was our largest price increase of the three that we have taken over the last 12 months. And, and it's on track. We do anticipate taking additional pricing as part of our plan and that will come in different forms, whether that be truckload increases or price pack architecture, which will start to begin in more earnest in fiscal year '23, as we've discussed before. And what we're watching right now is the reaction to July. It's too early to tell that is just hitting the market now and, and we'd want to get through a purchase cycle with the consumer to see how they're reacting. And as Kevin highlighted, we had seen our historical price elasticities, not play out over this last year. They were slightly better than that historical elasticity that we had experienced, but we're expecting that to return in fiscal year '23. So elasticity slightly worse and better in line with what we saw pre-COVID given the level of pricing and given what's going on with the consumer. So we'd anticipate they will, they will continue to be on track. Our categories remain healthy, but we're gonna watch that very closely and we will adjust any plans that we have as needed to address that. But, largely we expect to continue to use pricing as a lever to grow gross margin, not only through July, but through the course of the year.

Okay. Thanks. And then just a detailed question, the streamlined operating model, how much savings do you have embedded in guidance in fiscal '23? Is that savings more likely to play out in fiscal '24 or is there a decent chunk of it in fiscal '23?

Hi Dara, as you may have seen, we are projecting $75 million to a $100 million of savings over the next 18 months to 24 months. We are expecting about $25 million worth of savings this year as we begin the program. And then that'll continue in fiscal year '24. And in terms of, as you're sort of modeling it as you're modeling both the onetime restructuring charge, typically those charges come first. So I expect more restructuring charges in the front half the year, and then the savings start to occur in the back half of the year and then continue into next year.

We have a question from Kevin Grundy of Jefferies. Your line is open.

Great. Thanks. Good afternoon, everyone. I wanted to pick up on, on trade down risk Linda, I think you mentioned a handful of times about how the consumer is behaving and then, and we see that right. And increasingly I think across the categories, as we look at the syndicated data for Clorox, we're seeing private label pickup share across all of your key categories, trash bags, bleach wipes, salad, dressing, charcoal etcetera. I think a notable nuance with this has also been the price gaps have narrowed given some of the timing in terms of when you have moved versus private label as well. So we've seen some of the share loss or share gains for private label while, while price gaps have narrowed for Clorox versus private label, which is a bit perverse. And I think Kevin, you're also made the comment, that you expect, with some of this pricing that the price gaps will return to more normal levels. So, so that is to suggest that the price gaps will, will widen, which then, in theory for more, more price conscious consumer could, could perpetuate, some of the share issues that you've seen in your portfolio. So that's all sort of a big wind up Linda, I guess, for how worried, how did you contemplate what you're seeing with the consumer and some of these dynamics as you pulled together the outlook, maybe just comment, updated thoughts on trade down risk, where you are with price gaps, where you think you're gonna land et cetera. Thank you.

Sure. Kevin, thanks for the question. So maybe we start with your private label share question and, and talk a little bit about what we're seeing there and we can get into the broader piece around, what does that mean and what are we seeing more broadly in trade down? So as we've spoken about before the dynamics. As you look at any time period in scanner data, right now, it's difficult to parse out because you have many factors depending on the category. Normalization, the timing of pricing, which you already hit on, which is exactly right. Supply normalization, etcetera. So I would caution that looking at any small portion of time to get to a conclusion one way or the other, have to get in to a bit of the nuances. As it relates to private label and our categories, a good portion of that is the timing gap in pricing. So we've seen private label go a little faster in some of our categories. You call that out and it's true in trash and bleach in particular. In wipes, it is more about normalization and so wipes in that time period for Q4 private label grew five share points, we grew six. So it's not coming from us. And if you look at charcoal, another example where there's a different nuance, we grew share all outlets as consumers move to some channels and bought some larger sizes even though we were down slightly in Lulo. So I think again, just speaks to the dynamic nature of what we're experiencing right now, and you're right, as we return our price gaps to more normalized levels, which we continue to expect. And as we implement our July price increase, that is in market now. And again, as a reminder…

Our next question comes from Lauren Lieberman from Barclays Investment Bank. Your line is open.

Great. Thanks so much. Thank you. I had two sets of questions. The first thing is just on the SG&A and as you're talking about targeting a lower ratio over time and this kind of restructuring program that you're initiating. It strikes me that if anything, it has felt like perhaps Clorox has been more on the side of underinvested, not overinvested. The company's been, made a hallmark of running lean go lean was a program and that's been an approach. And so if anything, and maybe I'm off base on this, it's felt like part of the problem has been being too lean that hasn't afforded you, the visibility you've needed, the flexibility you've needed. And yet part of this plan going forward is to get more lean on SG&A. So I would just be curious on, on reactions to that and then I have a question on cash flow. Thanks.

Sure. Hi Lauren. So, as we think about just our investment and, and how this fits into the overall picture that we're trying to drive with Ignite, we were really clear and Ignite that we needed to be simpler and faster. That was a key choice that we made under the headline of reimagined work. And we also said we needed to invest strongly in our business. And we took that another step further when we announced the technology transformation that we're undergoing and the $500 million investment we're making in that program over the next several years, in addition, we've continued to invest strongly linear brands. We've invested in innovation and innovation as a larger contributor than it was in the prior strategy period. So I feel like we were making all of the right investments to ensure that we have strong brands with our consumers, and that is playing out in our consumer value measure. And we expect to play out over the mid to long term and share, certainly this quarter, wasn't the share performance we want to deliver, but we feel like we're headed in the right direction, but when it comes to this piece and what we want to do with the operating model, we want to make sure that we are always operating as efficiently as we can and putting the dollars where they matter in our business to ensure that we can grow our brands. And we believe very strongly that we can be more simple and fast, and that will help support that 3% to 5% growth rate that we have and restoring margins. We want to cut down on decision time. We wanna ensure that the technology we put in place through our digital transformation is supported by a structure that…

Okay, great. Thank you. That's excellent color. My next question was just on, on cash flow. So I was curious if there's any, Kevin cash flow metrics you could articulate that you're targeting for '23. And just in terms of in inventory, right because inventory days are still quite and I'm just curious, as you think through, obviously a lot of this is going to be tied to cleaning. A lot of this is tied to exiting those, the external supply contracts, but how should we be thinking about inventory days? And, what's the right level, right? You're still in the kind of low sixties and that's significantly higher than where you were pre-COVID. So just how that flows into the gross margin recovery story and '23 or beyond. Thanks.

Yeah. Thanks Lauren. For the question, maybe I'll start with inventory then I'll get back to cash flow and our expectations this year. As it relates to inventory I feel good about the progress we are making. If you look at the fourth quarter, we were able to reduce inventory sequentially about 50 million from where we landed in Q3. Now, part of that was what we talked about earlier as we exited these third party manufacturing agreements. And in many cases, we maintained raw materials or finished goods of these facilities. We're able to consolidate those manufacturing nodes and reduce our overall inventory levels and so we made good progress there. I expect this year, we'll continue to make progress on inventory. Now that assumes that we see more normalization in supply chain. Lauren, as we've talked in the past, we've had to hold higher inventory levels to prepare for the ongoing disruptions. We're dealing with our expectations as supply chain will still be challenged, but certainly not to the degree we've experienced over the last 12, 18 months. So as a result, we're gonna be able to pull down our inventory levels broadly across the enterprise. And so I'd expect us to continue to make progress. I like the progress I saw in Q4. I expect that to continue in fiscal '23, which it contribute to reducing our overall working capital. And then I think more broadly about cash. Lauren, I think this year very similar last year, I think in terms of cash provided by operations, we'll be in that $700 million to $900 million range. Now before our margins were under pressure, we were January about a $1 billion. And so I do expect it to be lower than our historical levels because of the reduced profitability we're expecting this year. And then as it relates to CapEx, as we target three to 4% per year. Now we've been a little above that in previous years that we've been making some investments to in increase our, our production capacity for the most part we're through those investments. We have one last plant we're working on where, as you may know, we're preparing to open up a second litter facility, which we'll bring online this year. So we've got a little bit more capital spending there, but I expect we'll be in that three to 4% this year and probably about the midpoint of that range. And so that means is you think about our free cash flow goal. We target 11% to 13%. I expect this year will be below, will be below that goal, probably high single digits as we've got some reduced profitability. And then over our time, I expect to build that back as we improve profitability.

Okay. The great, thanks so much for all the detail.

Sure. Thanks Lauren.

We have a question from Olivia Tong of Raymond James. Your line is open.

You have mentioned earlier that price elasticities have continued to come in better than you expected, but your outlook assumes that, that doesn't continue that they go back to the circle level. So to the extent that you do have some favorability there versus expectations. How do you think about what you do with that? Does it flow through to the P&L? Or is there -- are there projects that you want to do to drive some return free and funds to return to spending? And then just on the gross margin overall, 200 basis points expected for next year, so quarter of the way back, it sounds like you were expecting another quarter in fiscal '24. So is that the way that we should be thinking about the mechanics to get back to where you were before, just sort of like ratably fourth or fourth or fourth or fourth?

Sure. I'll start with your question on price elasticity. So if we were to experience better than what we expect, which again is more normalized price elasticities to historical pre-COVID then that would be something that we would first look to flow through. And of course, that's because we've made all the investments that we feel we need to make at this time in the year. We're investing in advertising. We have the right promotional spending from what we can see. And of course, if there was anything that were to change that we needed to address, then we would consider that, but we would leverage that in a way to flow through. And I just want to make sure I'm really clear on that. But we'll, of course, have to see given the environment is so volatile if there was anything else to come up, we would correct but that would be the first thing we would look to do.

And then, Olivia, on your question on gross margin and the pace of the margin recovery, as you mentioned, our expectation is we're going to improve gross margin by 200 basis points. I think important, though, is we expect that to build as we move through the year. And as I said earlier, our expectation is we're going to be close to a 40% gross margin when we end the year. So on a run rate basis, I expect to make fairly good progress this year and be in a position we've recovered a good portion of that margin decline. And then I expect that obviously to continue to '24 where the actions we'll take. Now part of the timing of our pace of margin recovery will be dictated by inflation. I would tell you, we are not waiting for cost deflation is our path to margin recovery. We're pulling every lever available to us between pricing, cost savings, the operating model changes we talked about today, and we'll continue to do that going forward. But obviously, what the direction inflation goes could either accelerate or decelerate that margin recovery. In this environment, it's hard to look beyond this year. with a strong perspective on where costs will be next year. And so that's something we'll probably have to see how it plays out a bit this year to make that call. So I think we're making solid progress this year on our commitment to rebuild margins. We're pulling every lever available to us. And I think it's a bit difficult to pick the exact time period. We'll build it back. I think some of that will be influenced by the external cost environment. As we move through the year, we'll certainly update you as we're thinking about the pace of that change.

Got it. And then my follow-up is on your thoughts around your trajectory on market share. Perhaps could you talk a little bit about what private label capacity looks like? And specifically in the health and wellness businesses. Obviously, a lot of pretty aggressive pricing and consequently a fair degree of volume degradation associated with that. So to the extent that consumers can first and foremost, stomach this much in terms of pricing, just kind of curious how you how private label capacity and their ability to step in looks as you consider these pricing and what that you're taking?

Olivia, I can't speak to capacity outside of our own network. I don't think there's a capacity limiter in our categories. That's not as we have spoken about in terms offer. But what I would really return to is what we're seeing in terms of the performance, it was down slightly versus a year ago. We made sequential improvement from Q3 to Q4. And again, I highlighted a few of those area that were due to pricing timing and then some other factors where we grew very strongly, for example, in wipes and private label did as well we were up 6 points, they were up five points from a share perspective. So I don't see any health issue at this point in our home care categories or our cleaning categories. Elasticities, again, are playing out as we define. And I think really, as we look to this, we will expect demand normalization to be the biggest contributing factor and the elasticities will largely play out as we expect. Again, we'll watch that very closely. But this is more about demand normalization than it is about any trade down to private label at this point.

And we have a question from Steve Powers of Deutsche Bank. Your line is open.

I guess, picking up on that thread of demand normalization, Linda. I guess I'm curious as to how you actually go about or have gone about defining what renormalized demand looks like in categories like wipes or cleaning and disinfecting more broadly and maybe how that compares to prepandemic levels? And as you talk about that, maybe you could, if possible, elaborate a bit more on the expected pacing to get there embedded in the outlook? I get the base year comparisons are going to create a lot of year-over-year volatility, but is the normalization process that you're envisioning, is that something that happens all the way through '23? Does it happen faster such that the headwinds are skewed heavily to the first half and the back half is more normal? Just how should we think about that?

Yes, Steve. On demand normalization we certainly are lapping impacts from COVID, but we're seeing changes in more normal behavior coming from consumers, and we're trying to understand when are we at a new normal. -- and it's more about lapse versus we're at that new normalization state. We saw, as Kevin and I said a couple of times, we're lapping delta right now where wipes were up from a unit base is 50% in our last Q1 and we did see a bump in Q3 as well. And so both of those will be left that we'll have to get through. So we're talking through fiscal year '23, we would expect that normalization. We are still seeing consumer behaviors, if you look at buy rate, et cetera, enhanced, and we're still seeing people care about cleaning and disinfecting elevated, but definitely lower than it was at the height of the pandemic, but higher than it was pre-COVID. So what we're trying to gauge is when does that new consumption pattern align to that desire from consumers who have a heightened state of awareness of cleaning and disinfecting and get into a more normalized routine. The other thing we're going to see how this plays out is cold and flu. Consumers have not experienced a normal cold and flu season since COVID started. So how will that reinforce consumer behaviors, and we'll experience that at the end of Q2 and through Q3. So we'll be watching that very closely. And then, of course, we're in a COVID wave right now. And so we're watching that dynamic as we lap last year's Delta Wave. So I would say we are watching this throughout the year, and we'll give indicators of when we start to see that more normalized demand, but we're looking something between where we were pre-COVID, which we continue to be above that. and what it looks like in a more normalized state when people are more aware and have a heightened concern but yet are getting into a new set of habits and routines. And we'll keep you updated as we see that and when we anticipate being in a more normalized state. But as you can imagine, given what's going on with COVID, et cetera, it is difficult to pinpoint exactly when that will occur.

Yes. Okay. That's all fair. Just one other question, if I could. Going back to the new operating model. I guess I was just curious for a little history on when the initiatives that you've you're rolling out here in '23 and into '24, when those were -- when those began to be contemplated? Just a little bit of history on how these decisions were made? And has this been planned for a while? Is this something that is more of a recent initiative? Just a little color there would be helpful.

Sure, Steve. This really relates back to the strategic choice we made in Ignite to reimagine work, and we wanted to be simpler and faster. And we always contemplated ways, as you would expect, you expect us to operate efficiently and be removing costs wherever we can. They were always looking at the choices across the ecosystem to say, are we getting the best return on our investment? Are there ways to do things more effectively and efficiently? We did that as we unveiled our digital transformation program. which we really needed to accelerate given the increase in digital behavior behind the pandemics, we moved that up. And as we evaluated the environment that we see now, we want to accelerate the progress we wanted to make on reimagine work by making a more structural change. So that I would say it's at this moment that we think it's the right time to do that. We've got to a bit more of a steady state when it comes to supply chain, still very challenged. We're still having force majeures, etcetera, but it's more manageable. And we think this is the right time to take it on, but it's really a continuation of that vision we laid out in 2019 to be faster and.

This concludes the question-and-answer session. Ms. Rendle, I would now like to turn the program back to you.

Thanks again, everyone, for joining us. I look forward to speaking with you again on our next call in November. Until then, please stay well.

This concludes today's conference call. Thank you for attending.